Ford and Volkswagen Are Partnering. A Merger Would Be Better.

Ford
and
Volkswagen
are expanding their commercial-vehicle alliance to include autonomous driving and electric vehicles, yet another example of an industry that is badly in need of consolidation preferring partnerships over full-blown business combinations.

The pair announced a partnership in January, collaborating on light trucks and commercial vehicles. In a Wednesday research report, Credit Suisse analyst Daniel Schwarz evaluated potential impacts of expanding that agreement.

Ford said Thursday that the companies would “share details of new collaborations” with investors on Friday.

“[Autonomous vehicles] and [electric vehicles] are requiring major investments,” Schwarz wrote. “Scale is crucial to cope with that.” Scale saves money, according to the Schwarz, and will step up pressure on other global auto makers to partner.

Of course, scale can also be achieved through a merger. What’s more, gaining market share in a mature industry is often a way companies seek to stabilize profits and returns throughout the business cycle.

“Cars is an industry sorely in need of consolidation,” one industry insider told Barron’s. “Name me a global industry that still has 25 to 30 major players—excluding all the auto makers in China—the largest has 12% market share and 10 brands.”

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Still no one, Schwarz included, sees major auto makers merging any time soon. The proposed
Fiat Chrysler Automobiles
(FCAU) merger with
Renault
(RNO.France) was shot down shortly after the idea was floated.

“The biggest issue with a merger versus partnership is that you can end a partnership a lot easier than a merger,” Seaport Global analyst Mike Ward said. “In a merger the goal is to eliminate redundant costs which means cutting jobs—always a tough move politically.”

In the automotive industry, one plus one doesn’t equal three—the goal of most mergers.

That’s unfortunate for automotive investors who are stuck holding stocks that trade at low valuation multiples. For instance, Ford (F), a company generating roughly $150 billion in light vehicle sales each year, trades for just 7.3 time estimate 2020 earnings. The
S&P 500,
by contrast, trades for 16.2 times estimated earnings.

Ford and Volkswagen Are Partnering. A Merger Would Be Better.

Ford and Volkswagen are expanding their commercial-vehicle alliance to include autonomous driving and electric vehicles, yet another example of an industry that is badly in need of consolidation preferring partnerships over full-blown business combinations.

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